One of the world's newest countries still struggles with international recognition. But its bigger problem could be its stagnant economy.

Members of the Kosovo Security Force march with a flag of Kosovo before the arrival of former Finnish President and Nobel Peace Prize laureate Martti Ahtisaari at Pristina international airport on September 10, 2012. (Hazir Reka/Reuters)

PRISTINA -- Aleksandar Josifovic was
studying computer programming in northern Mitrovica five years ago when
Kosovo declared independence from Serbia.

Josifovic hoped his studies would lead to a job in information
technology or as a teacher. But five years later, the 25-year-old Serb
from the town of Gracanica can only find work behind the cash register
of his father's small grocery store.

With Kosovo's widespread poverty and an official unemployment rate of 45
percent, Josifovic sees himself as a victim in a game of politics and
corruption where the rules are stacked against all but a handful of
elite families.

Many young ethnic Albanians also share his view, saying they await the
day when their generation has a chance to run things and more people can
be prosperous.

Half of Kosovo's 1.8 million people are 25 or younger. Half of those
under 30 are unemployed, and the situation is getting worse. Every year,
more than 30,000 young people enter the job market. Fewer than 8,000
find work.

​​Economists estimate Kosovo's economy must grow by 8 percent each year
to absorb the young people entering the job market and hold unemployment
steady. But Kosovo is in recession, struggling to maintain growth of
about 3 percent.

Put simply, Kosovo has not yet fully recovered from its 1998-99 war and
has failed since declaring independence to build a production-based
economy that can employ most of its people.

Kosovar Deputy Prime Minister Mimoza Kusari-Lila says the government's
political agenda has distracted it from dealing properly with economic
woes.

"Focusing always on political issues or having politicians engaging in
the political agenda -- be that the declaration of independence and
dialogue -- has left a little bit aside the economic development,"
Kusari-Lila says.

"I believe that we'll be working and focusing more on the economic
agenda [in the future] because the economic agenda will actually assist
and help the political agenda as well."

Playing Catch-Up

To be fair, Kosovo's infrastructure in 1999 was less developed than in
other parts of former Yugoslavia. About $1 billion has been spent since
then to build a four-lane highway linking Pristina with Tirana and
Albania's Adriatic port at Durres.

It is meant to eventually connect with the pan-European transport
corridor at Nis, Serbia -- which runs between Salzburg, Austria, and
Thessaloniki, Greece. Construction is also meant to start this year on a
55-kilometer highway between Pristina and Skopje.

Planners say both projects will improve Kosovo's trade links with its
neighbors. But municipal officials complain that the projects have
drained money away from their budgets, making it difficult for them to
fund their own infrastructure improvements that would improve the
business climate.

Kosovo's economy also still hasn't recovered from lost production at the Trepca mine complex in the divided city of Mitrovica.

​​Trepca once employed 23,000 and accounted for 70 percent of Kosovo's
gross domestic product (GDP). But since the war ended in 1999, the de
facto partition of Mitrovica between Serbs and ethnic Albanians has kept
most of Trepca's facilities closed.

Kusari-Lila still hopes Trepca will contribute to GDP in the future. But
she admits Trepca is unlikely to have the economic impact it had in the
past.

Oliver Ivanovic, a Serbian political leader in northern Mitrovica and
former Trepca manager, doubts the complex can be reopened without at
least $650 million in foreign investment to repair and update smelters
and refineries.

He says it will be impossible to get that investment without a political
resolution on northern Kosovo, where Serbs insist they will never
recognize Pristina's declaration of independence. "Under these
circumstances, with permanent political tensions, you simply cannot even
have thoughts about economic development," he says. "We have to make
some solution that somehow can be acceptable for both sides."

A Lack Of Production

Meanwhile, half of Kosovo's citizens struggle to survive on social benefits of less than $2 per day.

Informal employment provides some with a cushion against rising food
prices. Many more depend on relatives who work abroad to send them
money. But those remittances have been falling since 2011 due to the
global economic crisis.

The structural problems with Kosovo's economy are evidenced by the kind
of businesses dominating Pristina's industrial zone and the route to its
airport. Most are trading firms or retailers that import food,
clothing, and other essentials. Little is being produced in Kosovo for
domestic consumption or export.

That means most remittances going into Kosovo immediately exit the
economy to pay for imports instead of bolstering the local economy.

There are notable exceptions. One is the Pestova potato-chip factory in a
village north of Pristina, a firm that employs 120 people and brings
income to local farmers
​​
Founded in 1991 and reregistered in 1999 after the war, Pestova retooled
in 2008 with investment from the European Bank for Reconstruction and
Development (EBRD). It now supplies Kosovo's domestic market with fresh
potatoes and "Vipa" brand potato chips. Pestova also exports to Albania,
Macedonia, Greece, Montenegro, Croatia, and Germany.

But despite Kosovo's agricultural potential, Pestova manager and
majority shareholder Bedi Kasumi says local banks make it difficult for
agricultural firms to borrow money. He says interest rates charged by
Kosovo bankers for short-term agriculture loans are as high as 18
percent, compared to 5 percent in Serbia and 7 percent in Albania.

"The situation is very bad with the banks. The interest rates here are
very high -- the highest in the region," Kasumi says. "These are very
bad interest rates for loans in agriculture and also for production. We
hope that this situation will change."

Investment Discouraged

Substantial foreign direct investment -- which should be a driving force
for economic growth -- has failed to materialize in Kosovo amid
corruption scandals that have led to investigations against several
senior government officials.

Pristina's landmark Grand Hotel now stands dark and empty in the center
of the capital, just one example of a high-profile privatization delayed
by a corruption probe.

PTK telecom's privatization was pushed back for a second time in January
after an investment fund run by former U.S. Secretary of State Madeline
Albright, Albright Capital Management, withdrew its bid amid
international scrutiny over possible conflicts of interest and alleged
special treatment by Kosovo's political leaders.

​​Ilir Deda, executive director of the Kosovo Institute for Policy
Research and Development, claims that some members of Prime Minister
Hashim Thaci's government have driven away potential foreign investors
in order to protect their political and business allies from
competition.

"It affects enormously the bigger picture. This government has proved
quite successful at expelling every serious investor since 2008 who was
willing to come here and invest here," Deda says. "Investors from
Austria, Switzerland, and France have complained over corruption where
they wanted to invest, regardless of privatization."

Arta Istrefi, a spokeswoman for Kosovo's Ministry of Trade and Industry,
says the government is crafting legislation aimed at reducing the
potential for corruption by eliminating half of the business licenses
needed to start a new firm.

But Safet Gerxhaliu, president of the Kosovo Chamber of Commerce, says
the real corruption problems faced by businesses come after a firm is
already registered. Gerxhaliu says the most important thing Pristina can
do to improve the economy is to enforce the rule of law.

But Deda says Kosovo has a "culture of impunity" when it comes to
corrupt officials. "Any investigation that leads to big political
players in Kosovo is stopped for the sake of political stability -- and
it feeds on the culture of impunity, political impunity, that has been
created in Kosovo in the last 12 years," he says. "Short-term stability
[is favored] rather than midterm stability or long-term stability."

The World Bank has said that, like other economies in the western
Balkans, speedy recovery for Kosovo is unlikely without improvements in
public-sector governance, the labor market, and the overall investment
climate.

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